A primer on profit-taking for the fall season

Commentary: Hold ‘em, fold ‘em, or walk away is the question

By

DavidPenn

NEW YORK (MarketWatch) — It is a truism that bull markets end in euphoria. And that makes the current Era of Good Feelings in the stock market as good a time as any to start thinking about taking some chips off the table.

So if we stipulate that Apple
AAPL, -1.54%
right now is the ultimate “Hold ‘Em” stock — skepticism over the company’s first weekend iPhone 5 sales notwithstanding — then we’ve got three other scenarios traders and investors alike are wrangling with.

When to fold ‘em: Banks over too-big-to-fail

Over the next few months, financial stocks may offer some of the best performances of stocks from any other sector. Still under-owned and unloved by a significant fraction of the investing world, financials — especially banks like Wells Fargo
WFC, -0.68%
US Bancorp
USB, -0.27%
and PNC Financial Services
PNC, -0.65%
are maintaining their momentum as they close in on their pre-crisis highs.

This is not the case with the too-big-to-fail crowd of Goldman Sachs
GS, -1.60%
, Morgan Stanley
MS, -1.71%
, and Citigroup
C, -0.23%
, all of which are still trading far nearer to longer-term lows than longer-term highs.

I expect turbulence in the Wells Fargos and USBs of the world as they move toward the pre-crisis levels. But absent a major outside shock, I think these stocks successfully take out those pre-crisis highs between now and next spring. In fact, there’s an argument that these stocks are more likely to see a positive shock over the next several months (i.e., an improving economy, political continuity, and a resolution on the so-called “fiscal cliff”) than a negative one.

And with bullish seasonality soon at their backs, many of these stocks could play a key role in moving the market in its next leg higher.

When to walk away: Sin stocks, staples and dividends

Dividend stocks are always attractive during times of economic uncertainty. These stocks are all the more treasured when yields on fixed investments are low, providing a source of income for savers otherwise trapped in low yielding bonds.

Why walk away? Many of these dividend stocks have had great runs over the past several months, so some profit-taking is always worth considering. But there is also the possibility of a post-election change in the tax laws that would mean that income from dividends could lose its favored status. And while this might not amount to much for the thousands of investors who have their dividend stocks tucked away in tax-advantaged accounts like IRAs, it could be an excuse for those investors without that protection to begin calling it a day and rotating into other areas.

This doesn’t mean that you should dump your dividend stocks. But be prepared for more volatility from them than usual as those who decide to move on do so. Some of the stocks that fall into this high-dividend staples/sin category include Altria Group
MO, -1.01%
and Consolidated Edison
ED, +0.35%

When to run: Down goes the dollar!

As I wrote a short time ago, it couldn’t be clearer that the man nicknamed “Helicopter Ben” has moved his monetary rotorcraft into position.

What does this mean for traders and investors? In short, a lower dollar. The dirty little secret behind our debt-burdened, demand-poor economy is the fact that a little dollar debasement could go a long way toward helping support the recovery.

Whether you like the policy or not, that’s the game plan for the foreseeable future, and it is not especially dollar-positive in the intermediate-term, to say the very least. I’ll be watching the dollar via the PowerShares DB US Dollar Index Bullish Fund
UUP, +0.15%
as well as via the greenback’s chief antagonist in gold.

David Penn was most recently the editor in chief for TradingMarkets and from 2000 to 2007, he was the technical writer for Technical Analysis of Stocks & Commodities magazine. You can follow David on Twitter at @Need2KnowStocks.

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